With our new estimate of the cost of capital, Nike’s stock has been re-evaluated in the Discounted Cash Flow valuation. Lastly, this report uses the Multiple Valuation to compare Nike with five of its competitors. Our conclusion is that Nike’s cost of capital should be 9.91% and in 2001 Nike’s price should be $51.76, compared to the current market price of $42.09. Therefore, we suggest that Nike should be a good investment. 1.
Once we have calculated our D/E ratio we can then use the asset betas from comparable companies included in exhibit 5 to find the beta of equity for each line of business. Step three involves calculating the cost of capital for each line of business. Where the change takes place is the fact that we will be including the beta of equity of each line of business, which has factored in the outstanding debt the company has taken on. This new beta will alter the cost of capital for each business line. Lastly we will need to calculate the weighted average cost of capital for each division pertaining to its size relatively
* Consider the status of commercial aviation globally. Do Boeing's international strategies position the company to benefit from the most promising opportunities in foreign markets? ------------------------------------------------- ANALYSIS * Compare the two competitor's strategies. Based on the industry environment, what conclusions can be drawn? Each company monitors market signs to determine its next
A1 of 3 Formulas involved on the WACC calculations Corporate Finance - MBA 2009 Note written by Prof. Carles Vergara-Alert & Prof. Pedro Saffi 1 Objective This note tries to clarify the different assumptions and formulas used to calculate the Weighted Average Cost Of Capital (WACC) that you will find in different textbooks and articles. 2 The WACC formula The WACC formula is a weigthed average of the cost of equity and the after-tax cost of debt: W ACC = E D+E RE + D D+E (1 − τ )RD (1) being RE the cost of equity, RD the cost of debt, τ the corporate tax, E the market value of the firm’s equity, and D the market value of the firm’s debt. Note that sometimes we call V to the sum of D and E, therefore, V = D + E. Sometimes, not all the financing is provided by debt and equity. As an example, let us assume that some financing is provided by preferred stock as well as equity and debt. The WACC formula has to be modified to include the main sources of long-term financing of the firm such as preferred stock: W ACC = E D P RE + (1 − τ )RD + RP D+E+P D+E+P D+E+P where RP is the cost of preferred stock and P is the market value of the firm’s preferred stock.
Next, each item commitment quantity was calculated using its contribution margin and its total contribution in dollar to the revenue of the company. For e.g. if an item had a margin of $15 if sold, and $5 loss if not sold, the commitment value would be 0.75. Hence the optimal stock to keep would be three quarters of the probability of demand. If for instance, the corresponding error for 0.75 is 1.3, the optimal stock to keep for that item would be 1.3 * frozen forecast.
Mini case 3 1. Calculate re using the Discounted Cash Flow method (otherwise known as the Discounted Dividend Model) * The common stock price is $40 per share, and the dividend is $2. * The sustainable growth rate is .067 r equity = DIV1/P0 + g 2/40 + .067 .05 + .067 .117 or 11.7% 2. Calculate re using the Capital Asset Pricing Model CAPM cost of equity = r equity = risk free interest rate (rf) + β (rm – rf) .07 + .5(.07) = 10.5% 3- Calculate DCF cost percentage The discounted cash flow method, know as discounted dividend model, is a method to calculate the present value PV , it is an estimation of the present value PV of the cash flow associated with investment. DCF= CF/(1+r)1 where 16% is estimation of required prferred return rate DCF= .16/(1+.107) DCF = 14.45% For Question 5, we found that the book value of the WACC is lower as it is stated in p. 389 of the textbook.
- How can cost of equity be estimated without comparable public companies. 3. Analysis / Result: Let us consider and analyze the above mentioned points. Also refer to the Excel Sheet – Marriott; What risk-free rate and risk premium should be used for cost of equity: To increase shareholder value MC use shareholders’ measure to estimate the cost of equity, which is Capital Asset Pricing Model (CAPM). According to the CAPM, the cost of equity is found by; Cost of equity = (equity / capital) x [ Risk free rate + (Beta x Risk premium) ] Risk free rate is the rate of return expected
Similarly the seventh row of results shows that for a five-year holding period and a “middle level” of risk aversion, the optimal allocation is 40.2% in the risk-free, 41.4% in T-Bonds, 3.2% in World Bonds, 9.0% in Large Stocks and 6.3% in Small Stocks. This portfolio’s expected return is 4.71% and its standard deviation is 2.38%. As the target date approaches the allocation shifts from the higher risk asset classes to the lower risk asset classes to a majority in the risk-free asset. 3. Look at the results in Table 1.
Determine the major supporting points that will help in solving the above. I think the real issues here will be resolved by making the assumptions made when plugging in for these equations reasonable. Are Nike’s managers’ estimates of growth reasonable, or are their trends indicating decline more reasonable to use? In addition, what discount rate should be used? What are their costs associated with Equity vs Debt.
Using a spreadsheet for Problem 21, find the following: (a) What would be your recommendation if the weight for the transportation cost went down to 10 and the weight for union relations went up to 25? (b) Suppose location A received a score of 3 for transport cost and location C received a score of 2 for transport cost. Would your recommendation change under these circumstances? (c) The VP of Finance has looked at your scoring model and feels that tax considerations should be included in the model with a weight of 15. In addition, the VP has scored the locations on tax considerations as follows: A-3, B-2, and C-1.